will be sound – inside their borders, more than they do companies outside their own country. And by staying local, investors face less trouble come tax time, and much less foreign-currency risk. Many investors are wary of foreign markets anyway. It’s one thing to invest in a company based in your country whose products you see every day. It’s something else entirely to put your money into a company or market that’s on the other side of the world, in a place you’ve never been... and take a leap of faith that you won’t be ripped off. investing in what you know means taking on a lot more risk than you might realize... Sometimes, it makes sense to invest in something that you don’t know that well. If your home base is relatively affluent and stable, the volatility – that is, sharp price swings – of less developed markets might be unfamiliar. Getting enough information to make an informed investment decision – to at least come close to the standards of Lynch and But for your portfolio, “staying at home” by
That’s heresy to an entire generation of investors who came of age following legendary investor Peter Lynch’s advice to “invest in what you know.” From his perch as the portfolio manager of Fidelity Investment’s Magellan Fund – for years the world’s largest mutual fund – Lynch urged regular investors to apply insight they gleaned from their professional or personal experience to their stock investment decisions. Investing in what you see with your own eyes and experience in your regular day, as Lynch suggests, has some advantages... The steelworker might note an increase in shifts at his plant, the fast-food diner might spot long lines outside one particular chain, and the parent might know which big-box stores have the fullest parking lot. This philosophy promotes sticking to the familiar and comfortable. And that’s how most people choose investments... in other words, what they know. Lynch’s advice echoes that of legendary investor Warren Buffett, who warns investors to “never invest in a business you cannot understand.” It’s a lot easier to understand a business that you have direct experience with... that’s conducted in a language you understand... and is run by people who come from a similar culture. What’s more, investors tend to be more optimistic about their local economies and markets than foreign investors. Investors tend to trust companies – that the interests of management are aligned with those of small shareholders, and that corporate governance
Buffett – might feel impossible. However, we can simplify things...
First of all, investing in a foreign company is not so different from buying domestic stocks. Business is business, the world over. If you invest in profitable businesses that delight customers and grow responsibly, you’ll generally do well. Research shows that the
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